nep-ifn New Economics Papers
on International Finance
Issue of 2008‒10‒21
five papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Purchasing Power Parity and Real Exchange Rate in Japan By Long, Dara
  2. Real Exchange Rate Misalignment: An Application of Behavioral Equilibrium Exchange Rate (BEER) to Nigeria By Shehu Usman Rano, Aliyu
  3. Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price By Giri, Rahul
  4. Import Price Dynamics in Major Advanced Economies and Heterogeneity in Exchange Rate Pass-Through By Stephane Dees; Matthias Burgert; Nicolas Parent
  5. Exchange Rate, Employment and Hours: What Firm-Level Data Say By Pozzolo, Alberto Franco; Nucci, Francesco

  1. By: Long, Dara
    Abstract: This paper examines the validity of both the short-run and long-run purchasing power parity (PPP) hypotheses in Japan using two estimation methods, namely, a unit root test and an Autoregressive Distributed Lag (ARDL) cointegration test. Some important findings are obtained from our analysis. The first test reveals the mean reversion of real exchange rate (RER) in the long-run. On the other hand, from the second test, we found that there is a strongly robust long-run PPP relationship but no significant short-run PPP relationship. Furthermore, unlike the previous literature, this paper confirms the stability of the estimated results by CUSUM and CUSUMQ tests. Overall, the results suggest that PPP hypothesis in Japan strongly holds for the long-run while not for the short-run.
    Keywords: PPP; Real Exchange Rate; Unit Root; ARDL to cointegration
    JEL: C22 F41 F31
    Date: 2008–10
  2. By: Shehu Usman Rano, Aliyu
    Abstract: Abstract This paper seeks to estimate the long run behavioral equilibrium exchange rate in Nigeria. The empirical analysis builds on quarterly data from 1986Q1 to 2006Q4 and derives a Behavioral Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). The econometric analysis starts by analyzing the stochastic properties of the data and found all the variables stationary at first level of differencing. Accordingly, the paper proceeds by estimating vector-error correction models. Regression results show that most of the long-run behavior of the real exchange rate could be explained by real net foreign assets, terms of trade, index of crude oil volatility, index of monetary policy performance and government fiscal stance. On the basis of these fundamentals, four episodes each of overvaluation and undervaluation were identified and the antecedents characterizing the episodes were equally traced to the archive of exchange rate management in the country within the review period. Among others for instance, large inflow of oil revenues into the country and stable macroeconomic performance were discovered to account for undervaluation of the real exchange rate between 2001Q1 and 2006Q4 in Nigeria. The results further suggest that deviations from the equilibrium path are eliminated within one to two years. The paper recommends the pursuance of sound monetary policy as an instrument for achieving real exchange rate cum macroeconomic stability in Nigeria.
    Keywords: Keywords: real exchange rate equilibrium; stationarity; cointegration; Hodrick-Prescott decomposition; BEER and PEER.
    JEL: F31 G0
    Date: 2008–09–07
  3. By: Giri, Rahul
    Abstract: Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations.
    Keywords: Trade; international trade costs; distribution costs; law of one price; price dispersion
    JEL: F15 E31 F1
    Date: 2008–08–12
  4. By: Stephane Dees; Matthias Burgert; Nicolas Parent
    Abstract: This paper aims at showing heterogeneity in the degree of exchange rate pass-through to import prices in major advanced economies at three different levels: 1) across destination markets; 2) across types of exporters (distinguishing developed economy from emerging economy exporters); and 3) over time. Based on monthly data over the period 1991–2007, the results show first that large destination markets exhibit the lowest degrees of pass-through. The degree of pass-through for goods imported from emerging economies is also significantly lower than for those from developed economies. Regarding the evolution over time, no clear change in pricing behaviours can be identified and particular events, like large exchange rates depreciations during the Asian crisis, seem to influence the degree of pass-through related to imports from emerging economies.
    Keywords: Exchange rates; Inflation and prices
    JEL: E31 F3 F41
    Date: 2008
  5. By: Pozzolo, Alberto Franco; Nucci, Francesco
    Abstract: Using a representative panel of manufacturing firms, we estimate the response of job and hours worked to currency swings, showing that it depends primarily on the firm's exposure to foreign sales and its reliance on imported inputs. Further, we show that, for given international orientation, the response to exchange rate fluctuations is magnified when firms exhibit a lower monopoly power and when they face foreign pressure in the domestic market through import penetration. The degree of substitutability between imported and other inputs and the distribution of workers by type introduce additional degrees of specificity in the employment sensitivity to exchange rate swings. Further, wage adjustments are also shown to provide a channel through which firms react to currency shocks. Finally, gross job flows within the firm are found to depend on exchange rate fluctuations, although the effect on job creation is predominant.
    Keywords: Employment, Exchange Rate, Firm's Foreign Exposure
    JEL: E24 F16 F31
    Date: 2008–10–13

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